How company debt (and greed and tax avoidance) will sink us all

“Corporate addition to high debt threatens to destabilise the world economy. Not my words – those of the International Monetary Fund.

A recent report by the IMF says that “in a material economic slowdown scenario, half as severe as the global financial crisis, corporate debt-at-risk could rise to $19 trillion —or nearly 40 percent of total corporate debt in major economies—above [2008] crisis levels.”

In other words, in an economic slowdown, many firms will be unable to cover even their interest expenses with their earnings. Countries most at risk are US, China, Japan, Germany, Britain, France, Italy and Spain.

One study estimated that in 2018 UK s FTSE 100 companies alone had debt of £406bn.

Sinking in debt

Low interest rates have persuaded companies to pile-up debt in the belief that they will be able to use it to maximise shareholder returns. The key to this is tax relief on interest payments.

Ordinary folk don’t get tax relief on interest payments for mortgages or anything else because successive governments argued that such reliefs distort markets and encourage irresponsible behaviour.

However, corporations get tax relief on all interest payments. Currently for every £100 of interest payment, companies get tax relief of 19%, the prevailing rate of corporation tax, which reduces the net cost to £81. The tax subsidy enables companies to report higher profits.

Companies do not necessarily use debt to finance investment in productive assets. The UK languishes near the bottom of the major advanced economies league table for investment in productive assets and also lags in research and development expenditure.

British companies appease stock markets by paying almost the highest proportion of their earnings as dividends. BHS famously borrowed £1 billion to pay a dividend of £1.3bn. Carillion used its debt to finance executive pay and dividends. Thomas Cook had at least £1.7bn of debt but that did not stop lavish executive pay and bonuses.

Fatal effects

Corporate debt facilitates profiteering and tax avoidance. Water companies have long used ‘intragroup debt‘ to dodge taxes. Typically, they borrow money from an affiliate in a low/no tax jurisdiction. The UK-based company pays interest which qualifies for tax relief and reduces the UK tax liability.

Many a tax haven either does not levy corporation tax or exempts foreign profits from its tax regime. As a result, the affiliate receives the interest payment tax free.

It is important to note that the company is effectively paying interest to another member of the group and no cash leaves the group. The inclusion of interest payments in the paying company’s cost base can also enable it to push up charges to customers, especially if has monopoly rights on supply of goods and services.

Thames Water is an interesting example here. From 2006 to 2017, it was owned by Macquarie Bank and operated through a labyrinth of companies, with some registered in Caymans.

During the period, Thames’ debt increased from £2.4bn to £10bn, mostly from tax haven affiliates, and interest payments swelled the charges for customers. Macquarie and its investors made returns of between 15.5% and 19% a year.

For the period 2007 to 2015, the company’s accounts show that it paid £3.186bn in interest to other entities in the group alone. Tax relief on interest payments reduced UK corporate tax liability. For the years 2007-2016, Thames Water paid about £100,000 in corporation tax.

Private equity entities use debt to secure control of companies and engage in asset-stripping. A good example is the demise of Bernard Mathews, a poultry company.

In 2013, Rutland Partners acquired the company and loaded it with debt, which carried an interest rate of 20%. This debt was secured which meant that in the event of bankruptcy Rutland and its backers would be paid before unsecured creditors.

In 2016, Bernard Matthews’ directors, appointed by Rutland, decided that the business was no longer viable and sought to sell it. However, they only sold the assets of the company which realised enough to pay secured creditors, Rutland and banks.

The big losers were unsecured creditors, which included employee pension scheme, HMRC and suppliers. The purchaser of the assets told the House of Commons Work and Pensions Committee that it offered to buy the whole company, including its liabilities, but the offer was declined by Rutland because by dumping liabilities it collected a higher amount.

What needs to change

There is some recognition that corporate addiction to debt poses a threat to the economy. Following recommendations by the Organisation for Economic Co-operation and Development, the UK has placed some restrictions on the tax relief for interest payments, but that is not enough.

An independent enforcer of company law is needed to ensure that companies maintain adequate capital. Companies need workers on boards to ensure that directors do not squander corporate resources on unwarranted dividends and executive pay.

The insolvency laws need to be reformed to ensure that secured creditors can’t walk away with almost all of the proceeds from the sale of assets and dump liabilities.

And finally, tax relief on debt needs to be abolished altogether.”

https://leftfootforward.org/2019/10/prem-sikka-how-companies-use-debt-to-line-their-pockets/

Berlin to freeze rents for 5 years

“… Berlin’s state cabinet has agreed on a rent freeze for five years to counter rising housing costs in the German capital.

The city’s leftwing coalition government wants to freeze the rent for apartments built before 2014, according to a report by the German news agency dpa.

Only a minority of Berliners own their homes or apartments and rent has been rising sharply in recent years, forcing many to move outside the city. …”

https://www.theguardian.com/world/2019/oct/22/germany-berlin-cabinet-agree-five-year-rent-freeze?CMP=Share_iOSApp_Other

“Seaside residents dominate personal debt league in England and Wales”

Owl says: Has anyone seen policies to reverse this trend from our Local Enterprise Partnership? Or even from EDDC? Or DCC?

Hint: development in Exmouth is the “traditional” kind the article points out as leading to problems.

“Seaside towns and cities dominate the list of areas with the highest numbers of people getting into serious difficulties with debt, according to new figures.

Scarborough, the largest resort on the Yorkshire coast, ranked second out of 347 local authorities in England and Wales for personal insolvencies, while Torbay in Devon – which includes the town of Torquay – came third, said the accountancy firm UHY Hacker Young.

Plymouth, on the south coast of Devon, was ranked fourth, while Blackpool was in sixth place.

However, it was the city of Stoke-on-Trent in the Midlands which had the highest rate of personal insolvencies, recording just over 51 per 10,000 adults in 2018. The national average was 25, said the firm.

The insolvency rate includes personal bankruptcies, debt relief orders and individual voluntary arrangements….

Other coastal locations or regions featured in the firm’s “top 20” included Weymouth and Portland in Dorset, which includes the resort of Weymouth, which was in 12th place (39.6 insolvencies per 10,000 adults); the Isle of Wight, in 13th place (39.3 per 10,000); Great Yarmouth in Norfolk, in 14th place (39.2 per 10,000); Cornwall, in 17th place (38.5 per 10,000); and Hastings in East Sussex, in 19th place (38 per 10,000).

The accountancy firm said many coastal towns outside south-east England had struggled to replace their traditional industries with faster growth sectors such as financial services and technology. …”

https://www.theguardian.com/money/2019/oct/21/seaside-residents-dominate-personal-debt-league-in-england-and-wales?CMP=Share_iOSApp_Other

Bigger problems than Brexit?

“Lord Mervyn King calls for general election to provide mandate for either Leave or Remain.

Brexit is stopping Britain from addressing deep problems with its economy, a former Bank of England governor has warned.

Mervyn King called for an election and a new parliament to resolve the current impasse, claiming that “most people think that this has gone on for far too long and just have the view – ‘just do it’”.

He added that it did not matter whether people voted to remain or leave the European Union.

Lord King was speaking after MPs voted to delay a meaningful vote on the prime minister’s deal, forcing Boris Johnson to write to the EU to ask for a further extension to the Brexit process.

“It’s frustrating parliament can’t make up its mind and hasn’t been able to vote but let’s hope they do,” Lord King told Sky News after his speech at the International Monterary Fund’s annual meetings in Washington.

He warned the all-consuming nature of Brexit meant politicians were not looking at the UK’s underlying economic challenges.

“We have one of the lowest savings rates in the British economy of any country in the G20 save perhaps for Argentina. We’re not saving enough to finance our pensions or care for the elderly, or to finance infrastructure.

“These are the big challenges. What do we do about the education of 50 per cent of people who don’t go to college or university? It’s a great shame [Brexit] has dragged on so long.”

Although he claimed that Britain was “in the middle of the worst political and constitutional crisis for arguably several hundred years”, Lord King downplayed the impact Brexit could have on the UK and world economies.

“The decision to leave the EU is not likely to have a major impact on the UK economy in any way… I think there’s an awful lot of bogus quantification going on to justify positions held for other reasons,” he said. “I don’t honestly believe that Brexit has any great significance even for the rest of Europe, let alone the rest of the world. I don’t think the long-run economic consequences of the UK leaving the EU are particularly large.”

But he warned the global economy was in “great stagnation”, having grown more slowly and for a longer period than before the Great Depression of the 1930s, with levels of debt higher than they were before the 2008 financial crash.

Lord King, who governed the UK’s central bank for a decade until 2013, asserted the global economy would not be likely to suffer another financial crisis in the next 12 months.

But he warned of a global low-growth problem that wouldn’t be solved by another cut in interest rates, exacerbated by “extraordinary uncertainty”, and admitted “no one knows” whether another financial crisis is on the cards.

“We need a much wider set of policies to get out of this,” Lord King said.

The UK economy unexpectedly shrank 0.2 per cent in this year’s second financial quarter – its first contraction since 2012.”

https://www.independent.co.uk/news/uk/politics/brexit-economy-mervyn-king-bank-england-election-recession-debt-a9163531.html

Nearly 75% of government contractors are based in tax havens

“Almost three-quarters of companies who have been given major government contracts have operations based in tax havens, according to a new report.

Value Added, published on Sunday by the thinktank Demos, reveals that 25 of the government’s 34 strategic suppliers – organisations that receive £100m or more in revenue from the government – operate in offshore centres.

According to estimates, they account for about a fifth of total central government procurement spend. Of these, 19 had operations in jurisdictions included on the EU’s “blacklist” or “greylist” of countries that are considered to be non-compliant with EU international standards for “good tax behaviour”, according to the report.

The Labour MP and former chair of the public accounts committee, Margaret Hodge, said it was “perverse that the government continues to pay significant sums of taxpayer money to big corporations that practise tax avoidance on an alarming scale”.

There are claims that aggressive use of tax havens can distort competition.

The Labour peer, Lord Haskel, added: “For too long large international tech companies have failed to pay their fair share of tax while being rewarded with government contracts, leaving British companies at a competitive disadvantage.”

The Demos report states: “Large multinational companies, for example, continue to squeeze their tax contributions ever lower: the OECD estimates that US$100–$240bn (£78bn-£186bn) is lost globally in revenue each year from base erosion and profit shifting by multinational companies.” …”

https://www.theguardian.com/world/2019/oct/20/tax-havens-uk-government-pays-millions-strategic-suppliers?CMP=Share_iOSApp_Other

Time to ditch Barclays, before it ditches more of us?

“More than 120 MPs have accused Barclays of abandoning its most vulnerable customers amid a growing backlash over the bank’s move to stop its savers withdrawing cash from post offices.

In a damning letter to chief executive Jes Staley, the MPs criticised the bank for the ‘retrograde decision’, which they warned will only add to the ‘cash crisis’.

The politicians, co-ordinated by Labour MP Chris Elmore, urged the bank to reconsider and offered to meet American Mr Staley.

The Daily Mail has been calling on the banking giant to reverse its decision and has encouraged readers affected by it to write to Barclays.

The 124 MPs said they were ‘extremely disappointed’ by Barclays. Their letter said: ‘Quite simply, amidst the current uncertainty many people face around access to cash and wider banking services, this decision appears to be a retrograde step which will impact your poorest customers hardest.

‘It sends a message – rightly or wrongly – that those who cannot properly access the digital economy will have the carpet dragged from under their feet as our high street banks continue to abandon the communities that have sustained them for decades.’

Barclays faced a huge backlash after announcing it would stop its customers from withdrawing cash at post offices in January. The decision is estimated to save the bank £7 million a year, and comes after 3,312 high street bank and building society branches closed their doors between January 2015 and August this year.

At least 481 were Barclays branches, according to the consumer group Which?.

Gareth Shaw, head of money at Which?, said: ‘Barclays has shown real disregard to the needs of its customers through its reckless move to cease cash withdrawals from the Post Office. MPs are right to challenge this ill-conceived decision that risks leaving many of their constituents facing an uphill struggle just to access the cash they need.

In a damning letter to chief executive Jes Staley, the MPs criticised the bank for the ‘retrograde decision’, over the bank’s move to stop its savers withdrawing cash from post offices, which they warned will only add to the ‘cash crisis’

‘We’re calling on the Government to urgently intervene with legislation that protects cash for as long as it is needed.’

Free-to-use cash machines are also disappearing at an alarming rate. Some 500 were closed every month last year, according to the ATM network Link.

The Access To Cash Review, an independent investigation into the cash crisis, found that about 17 per cent of the UK’s adult population – 8 million people – would find it difficult to function in a cashless society.

Natalie Ceeney, chairman of the Access To Cash Review, said: ‘As [the Daily Mail] has pointed out, this is affecting customers across the country especially those who are older, poorer, living in a remote area or may be disabled. This will be filling up MPs’ postbags, so I’m glad to see widespread support for the campaign.’

Banking trade body UK Finance has repeatedly directed customers who do not live near cash machines or bank branches to the 11,500 post offices across the country which offer everyday banking services. Barclays was also sending out this message as recently as June.

A petition urging Barclays to reverse the decision had nearly 9,500 signatures last night. …”

https://www.thisismoney.co.uk/money/article-7585989/Post-Office-cash-ban-Barclays-customers-poorest-124-MPs-tell-bank.html

Unemployment much higher than official figures (but not in Exeter)

“Millions more people in Britain are without a job than shown by official unemployment figures, according to a study that suggests the jobless rate should be almost three times higher.

According to research from the Organisation for Economic Co-operation and Development (OECD) and the Centre for Cities thinktank, large levels of “hidden” unemployment in towns and cities across Britain are excluded from the official government statistics.

The study found that more than 3 million people are missing from the headline unemployment rate because they report themselves as economically inactive to government labour force surveys, saying that they believe no jobs are available.

It said the true unemployment rate should rise from 4.6% to 13.2% of the working-age population not in education. The OECD made the estimate by creating an adjusted economic activity rate, which removes students, pensioners, people caring for family and people with health issues.

In a stark analysis of joblessness across the country, the assessment raises the total number of people out of a job who could work from the official level of 1.3 million to almost 4.5 million.

The Centre for Cities said that urban locations faced the highest levels of hidden joblessness. Liverpool had the highest rate in the country, with around one in five working-age adults not in education finding themselves out of work.

At 19.8% compared to 5.8% on official statistics, joblessness in the city ranked just ahead of Sunderland, Dundee, Blackburn and Birmingham.

All the top 10 cities with the highest adjusted economic inactivity rates were found to be outside London and the south-east, and all tended to have weaker economies. In contrast, cities across the south-east had much lower jobless rates, with Crawley recording the lowest adjusted rate of just 2%. Oxford and Exeter were also below 5%. …”

https://www.theguardian.com/business/2019/oct/17/unemployment-figures-should-be-millions-higher-says-research?CMP=Share_iOSApp_Other

Post-Brexit employment law at risk

“Three low paid workers and their union are launching a legal challenge to make the prime minister seek an extension to the Brexit deadline.

The government has promised EU-law derived employment rights will remain in UK law after Brexit.

But if there were a no-deal Brexit, the union says, ministers would have free rein to water down these rights.

And workers could no longer rely on the supremacy of EU law, the EU Charter of Fundamental Rights or Court of Justice.

The Independent Workers Union of Great Britain (IWGB), is currently relying upon these aspects of EU law in a number of worker’s rights court cases.

The organisation, which represents some 5,000 workers – 1,000 of whom are EU citizens – has now filed court papers to begin legal proceedings.

Key workers’ rights based on EU law include:

minimum paid holiday
working hours regulation
equal pay
protection against discrimination
consultation on redundancy plans …”

https://www.bbc.co.uk/news/uk-49960647

“Capitalism Isn’t Working And People Are ‘Pissed Off’, Says Tory Former Minister”

“Capitalism is in crisis and and the government must radically reform the UK because “people are pissed off”, a Tory MP has said.

John Penrose said it is “clearly true” that the system “isn’t working well enough” for ordinary people and has not been since the financial crash.

The former heritage minister said people feel crushed by large corporations and angry at the “illegitimate corrupt wealth” of mansion-owning foreign oligarchs who are “some of the nastiest people on the planet”.

Penrose, who is Boris Johnson’s anti-corruption champion, also hit out at rising inter-generational inequality, with the number of pension-age people growing while the tax-paying working population who “pay for the benefits we have promised ourselves” was “shrivelling”.

“Pretty soon everyone under 40 will feel like the system is a conspiracy and it is a conspiracy against them,” he said.

But Penrose, the MP for Weston, was told by one Tory activist at the Conservative Party fringe event, organised by The Enterprise Forum, that he “sounds like a Labour MP”.

With a snap election on the horizon, however, Penrose said his party must acknowledge the current market system had faults.

“We can’t just sit there saying, it’s all working perfectly because it manifestly for quite a lot of people for the last ten years hasn’t been working, and they are hacked off,” he said. “They are pissed off.”

He added: “It is clearly true, clearly true, that at the moment capitalism, corporatism, business, call it what you like, free markets, isn’t working well enough for enough people in our society.”

Penrose said the “danger is that the devil has all the best tunes” and voters could turn to Labour’s socialist agenda as an “answer”.

“Roughly once every ten years, once a generation, something goes wrong with British capitalism, with Britain’s economy, quite fundamentally, and we have to remodel ourselves,” he said. …”

https://www.huffingtonpost.co.uk/entry/capitalism-isnt-working-says-tory_uk_5d929cf8e4b0019647ad810e

“Hinkley Point C: rising costs and long delays at vast new power station”

“The Hinkley Point nuclear site, on the Somerset coast, should have begun powering around 6m homes well over a year ago.

Instead, the 160-hectare (400-acre) sprawl is still the UK’s largest construction site more than a decade after the plan for Britain’s nuclear renaissance first emerged.

It will be at least another six years before Hinkley Point C, the first nuclear plant to be built in the UK since 1995, begins generating 7% of the nation’s electricity.

The price tag is expected to exceed £20bn, almost double that suggested in 2008 by EDF Energy, which is spearheading the project alongside a Chinese project partner.

At the time, EDF Energy’s chief executive, Vincent de Rivaz, said the mega-project would power millions of homes by late 2017. He pegged the cost at £45 for every megawatt-hour.

De Rivaz retired a decade later, but the promised switch-on moment remains distant. Delays have been blamed on protracted Whitehall wrangling over the project’s eye-watering costs: the price per megawatt-hour has since more than doubled.

Still, this summer workers carried out the UK’s largest concrete pour to complete the base of the first reactor. Simone Rossi, EDF Energy’s incumbent chief, said the milestone was “good news for anyone concerned about the climate change crisis”.

“Its reliable, low-carbon power will be essential for a future with no unabated coal and gas and a large expansion of renewable power,” he said.

The cost concerns have proved more difficult for executives and ministers to address.

The National Audit Office condemned the government’s deal to support the Hinkley Point project through consumer energy bills in a damning report, which accused ministers of putting households on the hook for a “risky and expensive” project with “uncertain strategic and economic benefits”.

Hinkley Point will add between £10 and £15 a year to the average energy bill for 35 years, making it one of the most expensive energy projects undertaken.

Under EDF Energy’s contract with the government, the French state-backed energy giant will earn at least £92.50 for every megawatt-hour produced at Hinkley Point for 35 years by charging households an extra levy on top of the market price for power.

The average electricity price on the UK’s wholesale electricity market was between £55 and £65 per megawatt-hour last year.

The dramatic collapse in the cost of wind, solar and battery technologies has made nuclear power even harder to swallow.

Despite its detractors, Hinkley Point has soldiered on because concerns over the project’s costs, although considerable, are still smaller than the concerns over the UK’s future energy supplies.

The project was first mooted under Tony Blair’s Labour government as an answer to the UK’s looming energy supply gap after years of underinvestment in the UK’s fleet of power plants.

The nuclear mantle was taken up in the coalition years by the Liberal Democrat energy secretary Ed Davey, before it was given the green light by the Conservative government.

Andrew Stephenson, the minister in charge of nuclear, said Hinkley was “key to meeting our ambitious target of net zero emissions by 2050”.

Nuclear power is controversial among environmentalists, many of whom do not consider the uranium-fuelled energy to be a sustainable option. But according to the government’s official climate advisers new nuclear reactors are needed.

The Committee on Climate Change expects renewable energy to play a major role filling the gap in energy supplies. Offshore wind will increase tenfold to help meet its 2050 target to reduce emissions to net zero, and the climate watchdog has called for onshore wind and solar to play a far larger role too.

But the advisers predict that at least two new nuclear reactors, in addition to Hinkley Point, will be required to help the UK meet its climate goals.

The verdict means households are likely to be called on to stump up for EDF Energy’s follow-on project at the Sizewell site in Suffolk. It also leaves the door open for a resurrection of plans to build reactors in north Wales, and possibly a Chinese-led nuclear project in Bradwell in Essex too.”

https://www.theguardian.com/uk-news/2019/aug/13/hinkley-point-c-rising-costs-long-delays-power-station?CMP=Share_iOSApp_Other